With President Obama’s proposed tax cuts passing the Senate, the House is set to vote on the proposed legislation before the end of the year. If the House approves the legislation as written, individuals that die in 2011 or 2012 and have an estate which is under $5 million dollars ($10 million for married couples), the decedent’s estate will be exempt from the federal estate tax.
However, these changes do not affect individual state estate/inheritance tax exemption levels. In Oregon, the state requires any estate with a gross value over $1.0 million to file a state inheritance tax return. This applies to any estate that has property located in the state of Oregon regardless of the value of the property located in Oregon.
For example, an unmarried California resident has $2.0 million in total assets. $500,000 of those assets consists of real property located in Oregon and a financial account with a brokerage company that the individual establishes and maintains in Oregon. The property is owned by that individual’s revocable living trust. When the California resident dies, the decedent’s estate would not owe any federal estate taxes nor would it owe any California state inheritance tax. However, the decedent’s estate will have to file an Oregon inheritance tax return and most likely pay an Oregon inheritance tax.
Whether any inheritance tax is owed is determined based on the net estate value, as determined by pre-2001 federal laws. The overall tax will be reduced pro-rata based on the value of the property located in Oregon. In other words, the decedent’s estate won’t pay Oregon inheritance tax on property not located in the state.
For Oregon inheritance tax purposes, property located in Oregon includes, among other things: real property that is owned by an individual or a revocable living trust, personal property physically located in Oregon, financial accounts that are located or maintained in Oregon (such as a brokerage account set up in Oregon), and other intangible personal property that is located or maintained in Oregon (an irrevocable trust where the trustee is located in Oregon or the situs of the trust is in Oregon).
Note that an individual’s interest in a limited liability company or other legal entity that owns real property located in Oregon probably would not be considered Oregon property as long as the member resides outside of the state of Oregon. The rationale is that the limited liability company is the true owner of the property and the member only owns a membership interest in the company which is personal property. Since the decedent lives outside of the state of Oregon, the property is not Oregon property for purposes of the Oregon inheritance tax.
Therefore, the argument is if the California resident owned an interest in a limited liability company that owned the real property, then that individual’s estate would not have to file an Oregon inheritance tax return or be subject to the Oregon inheritance tax. This argument has not been tested in an Oregon court but seems consistent with prior case law. Even if you don’t have a large estate there are a number of non-tax reasons to transfer real property located in Oregon into an limited liability company, including: limiting your exposure to liability if injuries occur on the property; avoiding having to file probate in Oregon; and ability to transfer interests in the real property to children without having to record a new deed upon each transfer.
As for the financial account, the individual could have transferred his account to a brokerage firm located in California. As long as the account is not maintained in Oregon at the time of death, the account is not considered Oregon property. Many people that move out of Oregon and establish residency in another state will continue to maintain a brokerage account in that state because they are comfortable with their broker. However, this comfort can come at a price.
Consequently, if you have property located in Oregon, personal, real or otherwise, and you are not an Oregon resident, you may still have to pay Oregon inheritance tax even when you do not have to pay federal estate tax or state inheritance taxes in the state where you reside.